Termination of the application of the circulars regarding the tax treatment of the intra-group “back-to-back“ financing transactions

Based on the tax alert that we have uploaded to our website with issue number 8/2022,  from 1st January 2022 companies that perform transactions with related parties may have an obligation to prepare a transfer pricing documentation file, subject to certain conditions (see the relevant tax alert for further clarifications).

Following the above, on 5 January 2023, the Tax Department issued circular 1/2023, which states that interpretive circular 3 (dated 30 June 2017) and circular 5 (dated 2 January 2019) will not be applicable as of 1st January 2022. Hence, the last date of their application will be the 31st of December 2021.

Therefore, the application of the simplification measures on the intra-group «back-to-back» financing transactions for tax purposes (e.g. the recognition of the net profit margin of 2% based on the provisions of interpretative circular 3 mentioned above), as well as the other provisions of the two circulars, will not be applicable as of 1st January 2022.

Accordingly, as of 1st January 2022, the intra-group «back-to-back» financing transactions must be performed at arm’s length pricing and conditions. Furthermore, subject to conditions, there may be an obligation to prepare a transfer pricing documentation file to document the said transactions, like all the other related party transactions which fall under the provisions of the relevant legislation.